25 February 2016 - Post by:
The latest figures published by the Financial Conduct Authority (FCA) show a significant increase in the number of Suspicious Transaction Reports (STRs) filed in the UK. In 2015 the FCA received 1,831 STRs – 13% more than it did in 2014.
Coincidentally, the FCA’s publication of its latest STR figures comes the day after a corporate broking and wealth management firm was censured and fined by the FCA for failings relating to its market abuse systems and controls. The failings identified by the FCA specifically highlighted failings in this firm’s procedures for escalating suspicious transactions and filing STRs, as well as its oversight of those procedures. Below we explore some of the practical learning points arising from this case.
What the 13% increase in STRs tells us
Since 2007, the number of STRs submitted have increased year on year, as the graph below demonstrates.
However, since 2011 there has been a significant uptick in the number of STRs filed. Why? Well there are several possible reasons, but on the run up to 2012 the FSA (as it then was) started to flex its enforcement muscles when it came to STRs. For example:
- In September 2009, the FSA fined an investment adviser £20,000 for failing to observe proper standards of market conduct. The basis for this finding was that the individual concerned had failed to identify that a transaction was being conducted on the basis of insider information, despite the presence of ‘clear warning signals’, and failed to escalate this transaction. The result? The individual’s firm failed to report the transaction to the FSA via an STR.
- In October 2011, the FSA took enforcement action against another individual for failing to exercise due skill, care and diligence as he failed to identify and escalate a suspicious transaction within his firm. Again, the end result was that no STR was filed by the firm in question. The individual in this case was fined £60,000.
Following these cases, the FSA wrote to firms in June 2012 about their expectations relating to STRs. In particular, the FSA noted its expectation that firms have in place appropriate systems and controls to prevent market abuse, including controls for generating STRs and maintaining records of suspicious trades investigated but not reported.
It is possible that this action by the FCA heightened awareness about STRs and the risks associated with them, thereby contributing to the sudden increase in STRs filed since 2011. The FCA has also regularly commented on STRs and provided feedback to the industry in terms of the quality of information it receives from STRs (e.g. Market Watch 48 and the FCA’s last Annual Report ). We commented on the practical issues coming out of these more recent publications in a blog post last summer.
A recent enforcement example
Earlier this week, the FCA publicly censured and fined a firm for failings relating to its market abuse systems and controls. The firm was also handed a restriction, banning its Corporate Broking Division from taking on any new clients for 72 days.
The key practical takeaways for firms from this case are as follows:
- Escalation: The firm in this case was criticised for expecting employees to make judgements as to whether a transaction was ‘sufficiently suspicious’ to warrant escalation to Compliance, as opposed to requiring employees to escalate all suspicious transactions to Compliance. The clear message from the FCA in this case was that firms should encourage their employees to escalate all suspicious transactions to Compliance (or whichever department handles this area) so that a decision can be taken as to whether an STR needs to be filed.
- Procedures: The FCA criticised the ‘insufficiently detailed’ procedures relating to STRs that the firm had in place. In particular, the FCA noted that the procedures did not say how suspicious transactions should be escalated, either to Compliance or to the FCA. Now may be a good time for firms to perform a health-check on their procedures relating to suspicious transactions and STRs to ensure that they are sufficiently detailed.
- Audit trail: The firm in question had not kept a log or audit trail of surveillance alerts and escalations of suspicious transactions. In addition, the firm did not record the rationale for deciding whether or not an STR should be submitted in any given case. Firms should make sure that they maintain a robust audit trail as to how they deal with suspicious transactions, including whether or not they decide to submit an STR.
- Management information: Firms’ senior management should receive regular and formal management information relating to suspicious transactions and STRs. In this case, the firm in question failed to produce such management information.
A good time for a health-check…
From July this year (when the Market Abuse Regulation comes into force), firms will be required to report suspicious orders (as well as transactions) to the FCA. This will present a range of challenges from firms, who may not have had such robust arrangements in place to spot potentially suspicious orders. In light of this, as well as the FCA’s recent enforcement findings set out above, perhaps now is a particularly good time for firms to revisit their procedures, training programmes and controls around suspicious transactions and submission of STRs to the FCA.
All in all, the FCA concluded that the failings of the firm referred to above resulted in a ‘substantive risk’ that suspicious transactions would not be escalated to Compliance and that STRs would not be filed. In addition, the FCA found that the lack of suitable management information could have resulted in ‘the Board failing to recognise and act on emerging market abuse risks and issues’.